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Eleventh Circuit Stops Plan Confirmation Stampede
"When a modification to a Chapter 11 reorganization plan materially and adversely affects the treatment of a class of claim or interest holders, those claim or interest holders are entitled to a new disclosure statement and another opportunity to vote." In re America-CV Station Group, Inc., 2023 WL 109967 (11th Cir. Jan. 5, 2023). In this case, the U.S. Court of Appeals for the Eleventh Circuit just upended a hastily confirmed reorganization plan. Its holding should stop the stampede known as the "confirmation express." The bankruptcy court had summarily approved a plan modification that "materially and adversely affected" the rights of objecting pre-bankruptcy shareholders (Shareholders), depriving them of procedural protections and impairing their substantive rights. In reversing, the Eleventh Circuit directed "the bankruptcy court to fashion an equitable remedy …." Id. at *8.
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Debtors routinely modify reorganization plans shortly before a confirmation hearing. These modifications usually are either immaterial or are consensual. In the words of the Eleventh Circuit, modifying the plan "before confirmation is relatively easy: the 'proponent of a plan may modify such plan any time before confirmation.'" Id. at *4, quoting Bankruptcy Code (Code) §1127(a). "Easy modification allows negotiated outcomes to quickly become part of the plan," said the court.
There is an important limit, though, to easy plan modification. Aside from substantive and procedural constraints, discussed below, a creditor or equity holder of a corporate debtor or LLC is entitled to procedural protections if the bankruptcy court finds that the modification "materially and adversely changes the way that claim or interest holder is treated." Id., quoting In re New Power Co., 438 F.3d 1113, 1117-18 (11th Cir. 2006). When the parties appear to have accepted a plan and a confirmation hearing approaches, however, courts and most parties are eager to have the court confirm the plan quickly and move on, ignoring objections from interested parties, dismissing them as noise. That is apparently what happened in America-CV.
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